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Monetary-fiscal interactions under price level targeting

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  • Guido Ascari
  • Anna Florio
  • Alessandro Gobbi

Abstract

The adoption of a "makeup" strategy is one of the proposals in the ongoing review of the Fed's monetary policy framework. Another suggestion, to avoid the zero lower bound, is a more active role for fiscal policy. We put together these ideas to study monetary-fiscal interactions under price level targeting. Under price level targeting and a fiscally-led regime, we find that following a deflationary demand shock: (i) the central bank increases (rather than decreases) the policy rate; (ii) the central bank, thus, avoids the zero lower bound; (iii) price level targeting is generally welfare improving if compared to inflation targeting.

Suggested Citation

  • Guido Ascari & Anna Florio & Alessandro Gobbi, 2020. "Monetary-fiscal interactions under price level targeting," Papers 2010.14979, arXiv.org.
    • Handle: RePEc:arx:papers:2010.14979
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    References listed on IDEAS

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    Cited by:

    1. Piergallini, Alessandro, 2022. "Average inflation targeting and macroeconomic stability," Economics Letters, Elsevier, vol. 219(C).

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